March 29, 2009

Financial Independence Through Debt-Free Living

For a couple of decades now, we’ve been told that the best (and really only) way to achieve a functional level of wealth is to invest.Makes sense; after all, how else do you make money grow over the long term?Putting money into 401ks, IRAs, and real property have long been touted as the magical keys to the wealth kingdom.And when we talk about achieving wealth, of what really are we speaking?We are speaking of attaining financial independence – the ability to live unencumbered by the demands of work and creditors.To that end, I would suggest that you spend as much (or even more) energy on eliminating debt as in contributing to investments.

Take a home mortgage, for example.It is astounding how many people are comfortable nowadays with a monthly mortgage obligation in their 60s, 70s, and beyond.An analysis of available data tells us that through the early 1980s, it was unusual that retirees carried mortgage debt.Now, it’s much more prevalent.The result is that couples who otherwise might need to account for no more than $500 to $1,000 per month in regular monthly living expenses are instead looking at needing over three times that amount just to survive, thanks to mortgage debt, car payments, and other credit obligations.From a financial planning standpoint, the ramifications are significant.$500 to $1,000 per month is quite manageable for a couple that has between $150,000 and $250,000 in savings, to go along with Social Security benefits…and if things get really bad, the equity in a 100% wholly-owned house can be tapped for more income in the form of a reverse mortgage.However, if the burdens of current debt are such that monthly obligations total $3,000 or more, the amount required to have set aside, even with an anticipated Social Security benefit, shoots to somewhere in the range of $750,000 to $1.5 million.

Those who are familiar with my philosophy on retirement know that I don’t really believe in it, as a general rule.Accordingly, some of you might read this column and say, “Then what’s the big deal?You’re against people retiring anyway, so what does it matter if they have a lot in the way of monthly expenses?”Allow me to clarify.I AM against retirement, because I think it’s an unnecessary and even harmful waste of both human and financial resources.However, I don’t propose that the financial reason you’re still earning an income at 75 should be to help pay your mortgage and other consumer debt obligations; rather, I’m suggesting that it’s to help bolster your savings and therefore put even more distance between you and the street; added insurance, as it were.As I have always said, there is a very good chance that even if you’re inclined to embrace my strategy to keep working well into your advanced years, there will be a period of time that sits in between that which signals the point at which you cannot work any longer, and the event of your death.It is that period of time, of undetermined length, for which you should be principally preparing.

Unfortunately, the “debt is good because having stuff is great” mentality that has come into vogue over the recent decades has found many retirement-age people burdened with crushing debt, and it’s a shame.Whatever perceived reward lies therein is still a mystery to me, because I can imagine no greater reward than the financial freedom that comes with carrying absolutely zero consumer debt.Focus on achieving that end every bit as much as growing your retirement accounts – it is often the most important component to realizing ultimate financial independence.

You should hire a knowledgeable bankruptcy attorney that can guide you through the entire process. They help clients facing foreclosures on how to pay off the debts or to design plans on how to distribute the remaining assets to creditors.